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Cash-Out Refinancing
Defined
Cash out refinancing is an alternative to
taking out a second mortgage home equity loan. A cash out
refinanance is like buying your house from yourself for a
higher price than your current mortgage balance. The money
from this transaction is used to pay off the original mortgage,
and the difference is given to you.
This type of home equity loan is not suitable for everyone.
Saving money is the purpose of the cash out refinance. An
up front closing cost is required before the loan is given
so you should be able to recoup this amount in an exceptable
time frame.
Cash out refinancing is not a good option for you if you
do not lower your monthly payments. As with most types of
home loans, people with interest rates that are equal or lower
than the current standard rates should not use this method.
Refinancing into a loan with a higher interest rate causes
monthly payments to be higher, and you will lose money in
the long run.
If a pre-payment penalty clause exists in the mortgage contract
you should not consider a cash out refinance as an option.
When a home is refinanced, the existing mortgage will be paid
in full. A pre-payment penalty clause (pre-payment
penalty info) will require that you pay an additional
fee of a certain percentage to your current mortgage lender.
It is not a good idea to refinance for the full amount of
your home's appraised value. You should always have a cushion
in the event that you need to sell your home. Though it is
unlikely that a home's appraised value will decrease, it is
possible. Therefore, a good rule of thumb is to not refinance
for more than 8 percent of the home's appraised value.
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